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Saturday, September 10, 2016

Hard Brexit likely if there's no U-turn

The UK is likely heading for a so-called hard Brexit if a U-turn isn't made. And while a U-turn may seem unlikely given it would prove to be political suicide and cause 'outrage' amongst those who voted for Brexit, it would be the least destructrive course, economically, for the country.

Mixed messages and confusion

The possibility still exists that Brexit may not happen at all. Wishful thinking, many Brexiteers may say. However, there are already strong divisions growing in parliament and even amongst Tory ranks [Guardian].

There are mixed messages coming from May's own cabinet. David Davis's claim that staying a part of the single market would be "improbable" was quickly slapped down as being "his own view" and "not government policy" by Downing Street [Bloomberg].

Frosty reception at G20

Returning from her first G20 summit - where May received a less than enthusiastic welcome from Japan, the US and China in the wake of the Brexit vote - the new PM continued to insist that Brexit meant Brexit. However demands for what the government plans were concerning this she retorted that she would not give a "running commentary" on developments.

This has in the minds of some reinforced the opinion that some two months since the vote the new May government is just as clueless and still without a plan as to how they might deliver Brexit, let alone "make a success of it"

No clear plan

There are some politicians and many lawyers who say that the European Communities Act 1972 has to be repealed even before Article 50 is invoked [Independent]. This could also pave the way for an erosion of workers' rights [Labourlist]. The issue surrounding the European Communities Act 1972 will be decided in a High Court hearing later this year and it be judged to be the case that a repeal is necessary, parliament may be forced to vote on the matter. This in itself could at the very least see a delay in May being allowed to legally invoke Article 50 unilaterally. And given the workings of parliament, and the possibility the House of Lords could also slow down procedure, that delay could be anything up to a year.

Even with Article 50 invoked and Britain's negotiating position put before EU negotiators, there then remains a long waiting game which could drag on for two years. The mulling over of Britain's position indeed could be just sat on until that two year deadline expires before being handed back with a rejection and an offer on what the EU will accept. This might leave Britain with little choice as to either accept the offer or go for a so-called hard Brexit.

Hard Brexit

Aside of some hardline Brexiteers, few would want a hard Brexit. This is in essence a reversion to a WTO trading position in which the UK would be an independent country making its own trade deals. This to many Brexiteers sounds fine on the surface, but it would essentially mean Britain would have to renegotiate a trade deal with every country in the world and this could take years [FT].

Known as World Trade Organisation access, under this model the UK would rely on its membership of the WTO for access to European markets and as a first step towards full-blown free trade agreements with other blocs and countries — including the EU.

But the process would not be an easy one. The UK would first have to detach itself from the EU and regularise its position within the WTO before it could sign its own trade agreements, including with the EU. As Roberto Azevêdo, the WTO's director-general, said recently, there is no precedent for a WTO member extricating itself from an economic union while inside the organisation [FT]. The process would not be easy and would likely take years before the UK's WTO position was settled, not least because all other member states would have to agree. And while the task might not be impossible it could take many years to agree the schedules during which time the UK's legal status as a trading nation will be undetermined, with all that implies for uncertainty and business decisions.

Damaged economy

Such a position would not only diminish Britain's position on the global stage when it comes to trade it could seriously affect the country's economic position. Confidence might already be lost and some companies may already have uprooted base to shift to mainland Europe. Such noises have already come from the Japanese and most recently Ryanair who feel Britain's position in Europe will be weakened by Brexit and labelled UK politicians 'headless chickens' [Sky News].

Forex trading has already diminished since the Brexit vote with reports in the FT saying that it was unlikely Britain could recoup. And passporting is likely to disappear too if the sounds coming from various parts of the EU are to be believed.

Top Czech negotiator Tomas Prouza said in an interview last Wednesday that there was a very low chance for British financial institutions and other companies to keep unhindered access to the free-trade zone. The state secretary for EU affairs in Prague said the UK's current proposals for a post-Brexit agreement with the European Union were "completely unrealistic" adding that Britain must grant access to workers, contribute to the bloc's budget and submit to legislative oversight in order to keep single-market access.

Talking to CNN's Richard Quest this week Claudio Costamagna, the Chairman of Cassa Depositi e Prestiti (CDP), said Britain should not be allowed to keep its passporting rights in any form of Brexit. Like all members, each will be able to veto a Brexit deal if they are unhappy with the proposals put forward. And there is growing that the likes of the Czech republic, Poland and Hungary would do just that if the UK does not accept the so-called four freedoms, that being the free movement of goods, capital, services, and people. This was a "red line", especially for the Poles, Czechs, Hungarians, Prouza said

Growing hostility from Europe

Some of the EU's negotiators may also be hostile to Britain in other regards. The Express described the appointment of Guy Verhofstadt as one of three EU Brexit negotiators as a 'stitchup' given his pro-European stance [BBC / Deredactie].

To sum up, it all comes down to cherry picking, something the EU has wholeheartedly rejected. It sums up a growing hostility that has been growing in mainland Europe for many years.

As Michel Rocard, a member of the Socialist Party in France and served as prime minister under François Mitterrand from 1988 to 1991, wrote in a piece in Le Monde some two years ago, Britain had attempted to dumb down many aspects of the EU whilst the EU had continually bent-over backwards to accommodate Britain [Guardian].

Any weakening on this position would risk others within the EU thinking about their own referendum in an attempt to renegotiate their position. And it would also weaken Europe's hardline position on Switzerland which voted to limit the rights of freedom of movement of people following a referendum but which resulted in swift retaliation from Brussels.

While it might be read, by Brexiteers especially, that Brussels is essentially dictating the rules, the club - that being the European Union - has to have rules to work. One cannot have some members only following one set of rules while others are obliged to follow another set of rules.

Voices of optimism

There are those that say Britain will 'eventually' flourish after Brexit, though the time scale might well outlive many of those that voted for it. There are those with the opinion that the European idea is dead and Brexit is just the first domino to fall.

Far more likely is that, given Britain follows through with Brexit, its economy will flounder for decades to come while Europe strengthens without a partner that has impeded its development on so many levels.

The likes of Wetherspoon's Tim Martin dismiss such scaremongering and points to the fact that since the Brexit vote little has happened other than a drop in the value of the pound [Guardian]. However, what he fails to point out is that Britain has not yet left the EU.

Looking back to an Imperialist past

Many Brexiteers have insisted Britain can trade with the Europe outside the single market and should build trading relationships with former commonwealth countries.

These are Australia, New Zealand, Canada, Jamaica, Antigua and Barbuda, Belize, Papua New Guinea, St Christopher and Nevis, St Vincent and the Grenadines, Tuvalu, Barbados, Grenada, Solomon Islands, St Lucia and The Bahamas.

Remainers however point to the fact that Britain already trades with many of these countries albeit through agreements made through the EU. Furthermore despite a recent fanfare by some Brexiteers that Australia was willing to sign up to post-Brexit trade deals, there are also voices coming from Australia that somewhat dampens the mood.

News that the two countries would start scoping a deal made headlines in the UK, with suggestions the country could become awash with cheap Australian wine and beer. Politicians described it as a "win-win" for two historically aligned countries both looking for a "friendly face" [BBC / Telegraph].

But only days after returning from the G20 Australia's trade minister Steven Cobio said any special relationship with the UK was in the past. In addition Ciobo said Australia would prioritise talks with the EU and that no formal talks could happen until the UK had actually left the European Union [Independent /

Even with any new trade deals it is hard to see how Britain might benefit. Commonwealth trade is worth an estimated nine per cent of British imports and exports according to UK government figures.

And while Australia's exports are significant in themselves, labour cost and transportation would likely make many such exports expensive for Britain, especially should WTO tariffs be applied [News.com.au] .

Australia has seen a slowdown in its own economy. And with some 70% of Australia's economy being services based, it is a country much like the UK where manufacturing is of lesser importance. In particular financial services and healthcare were two of the leading contributors to growth in 2014 [UKgov].

'Europe needs us' mantra

Those in favour of Brexit have continually claimed that Europe needs the UK and would not cut its nose off to spite its face by forcing the UK out of the single market should it not sign up to the four freedoms.

But the "they need us more than we need them" argument simply does not reflect the facts.

The UK currently relies on the EU as a whole for a significant import/export drive. 45% of all UK exports go to the EU. Meanwhile 53% of Britain's imports into the UK came from other countries in the EU in 2015 but accounts for less than 16% of the EU's whole export trade [research briefings].

Building more walls

There is now talk that Europe might introduce visas for counties outside the 26 Schengen member signatories which would leave Britain even more isolated [Guardian / Independent / Telegraph].

And there is also talk of a UK funded Calais wall to keep out migrants [BBC]. This comes as at least one senior French minister said his country could ditch the Le Touquet agreement if Britain quits the EU which would force Britain to withdraw customs and immigration checks from France and could see a greater influx of people seeking to enter Britain with the risk that a Jungle style refugee encampment could spring up in Kent.

In the end it is down to the politicians, even if the British voter has expressed an opinion - albeit with a slim margin leaning towards Brexit.

But there appears to be no scenario, looking forward, that is without pain for Britain and its economy at least in the near to mid term [IIEA - PDF]